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Thailand’s consumer prices fell for the first time in nine years in January, giving the central bank room to cut interest rates this month.

Consumer prices dropped 0.4 percent from a year earlier, after gaining 0.4 percent in December, the Commerce Ministry said today in Bangkok. That’s the first contraction since October 1999. The median estimate of 13 economists in a Bloomberg News survey was for a 0.3 percent fall.

“Taking this together with the terrible numbers on the growth front, the central bank is going to retain its aggressive easing stance,” said Prakriti Sofat, a Singapore-based economist at HSBC Holdings Plc. “Deflation is caused by a collapse in commodity prices. Nevertheless, underlying price pressures are cooling.”

The Bank of Thailand may reduce its policy rate for a third month as the global recession pummels Southeast Asia’s second- largest economy, said Sofat. The central bank’s Governor Tarisa Watanagase says rising “risks” have made commercial banks reluctant to lend. Manufacturing production dropped by the most ever in December as demand for exports tumbled.

Indonesia

Indonesia today said inflation slowed to a nine-month low last month. That may prompt policy makers in Southeast Asia’s largest economy to also cut interest rates for a third straight month, Sofat said.

The price of crude oil, almost all of which Thailand imports, has fallen 59 percent in the past year and led to lower gasoline prices. Lower fuel prices also contributed to Indonesia’s slower pace of inflation.

Thailand’s economy may shrink this quarter and probably contracted 3.5 percent in the three months to Dec. 31, the Finance Ministry said Jan. 29. That would put the economy into recession for the first time since gross domestic product contracted for two consecutive quarters to March 31, 1999 free credit reports.

Bank of Thailand policy makers next meet to decide on borrowing costs on Feb. 25, when Sofat predicts they will cut the one-day bond repurchase rate by three-quarters of a percentage point to 1.25 percent. The interest rate has been lowered 1.75 basis points in two reductions since Dec. 3.

Waning Demand

Core inflation, which excludes fresh food and fuel, slowed to 1.6 percent last month from a year earlier, the Commerce Ministry said today. Economists surveyed by Bloomberg News estimated a 1.6 percent pace after a 1.8 percent rate in December.

Inflation this year may be no more than 0.5 percent, compared with a 5.5 percent pace last year, Commerce Ministry Permanent Secretary Siripol Yodmuangcharoen said today. That’s based on an assumption crude oil in Dubai will average between $50 and $60 a barrel this year, compared with $93.97 in 2008.

Thailand’s banks have stopped short of fully passing on the central bank’s rate cuts, lowering loan and deposit rates by only as much as 0.5 percentage point. Lending this year may expand by about 5 percent, according to the Thai Bankers’ Association. That would be less than half the 13 percent pace posted in 2008 by Bangkok Bank Pcl, the nation’s largest.

The bankers’ association today said it has asked the government to provide 54 billion baht ($1.54 billion) as part of a loan-guarantee program. Prime Minister Abhisit Vejjajiva, who hadn’t yet responded to the request, yesterday said such a program was “absolutely essential.”

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